IRMA

Institute of Rural Management Anand

Course Name: Financial

Management Programme: PGDM-RM42
FPM-RM20
Date: 14.03.2022 Term Roll No.

End-Term Examination

Duration of Exam: 2 Hrs Weightage: 30% Total Marks: 40

1. Solve the followings: (5+5)

(a) A portfolio
consists of two securities A and in the proportion of 3:2. The correlation
between the two securities is (-)0.50. The expected returns (ER) and standard deviation
(SD) are as below:
A B

ER 20% 10%

SD 30% 20%

Calculate the expected return and SD of the portfolio.

(b) Discuss the limitations of the IRR technique of capital budgeting and the advantages of
the MIRR technique the IRR
over
technique.
2. Given risk-free rate (R;) 6%, expected market return 16% and expected return
=
on a stock
is 18%. Estimate the
systematic risk of the stock. (10)
i. Analyze the return on the stock if its beta
(market risk) falls to 0.80.
ii. Analyze the return on the stock if inflation increases
by 100 basis points.

3. Explain the following.

(5+5)
(a) Discuss the Modigliani and Miller theorem on the capital structure without and with
taxes
(b) Show that with financial leverage, expected return for shareholders increases.

4. Explain the following. (5+5)

(a) ABC Ltd sells a chair for Rs. 1,000. The variable costs (per unit) and fixed operating o
are Rs. 600 and Rs. 100,000, respectively. For interest expense of Rs. 80,000, calculate the
degree of operating and financial leverage when sales are 1,000 and 2,000 units.
(b) Compare the two degrees of operating and financial leverage at different levels of sales
and comment.

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